Introduction

In response to mounting calls for liberalization of its lucrative securities industry to foreign investors, the China Securities Regulatory Commission ("CSRC") revised the Rules on Establishment of Securities Companies with Foreign Equity Participation on 28 December 2007 (the "Revised Rules") and issued the Provisions for the Establishment of subsidiaries of Securities Companies (Trial Implementation).  The Revised Rules revising the existing rules promulgated on 1 July 2002 (the "Old Rules") became effective on 1 January 2008.

Under the Revised Rules, foreigner's participation in Securities Joint Venture ("JV") in China need no longer to be established in the form of a limited liability company.  JV can be carried out in 2 ways as summarized in Article 2 of the Revised Rules :-

(1)         Domestic and foreign shareholders jointly set up a new Securities JV; or

(2)         Foreign shareholders acquire the shares of a domestic securities company and convert the domestic securities company into a Securities JV.

Qualifications of the Foreign Shareholder

Compared to the Old Rules, the qualifications of a foreign shareholders are much lowered.  The track record required for the foreign shareholders is reduced from ten years to five years and only one of the foreign shareholders is required to be qualified in the financial business in its home country.  The Revised Rules will allow institutional investors with more diversified background to participate in the investment of Securities JV in China which is good news to overseas investors.

Under the Revised Rules, the foreign shareholders of Securities JV shall satisfy the following conditions under Article 7 :-

(1)        The home country where the foreign shareholders are located must be equipped with comprehensive securities laws and regulatory regimes; and such home country or region must have signed a memorandum of understanding with CSRC or authorities recognized by CSRC;

(2)         Legally incorporated in its home country and with at least one of the foreign shareholders being a qualified entity engaging in financial business in their home country, and the foreign shareholders cannot transfer its shareholding in the Securities JV within 3 years;

(3)         Continually operating for at least 5 years and no severe punishment by the regulatory, administrative or judicial authorities in its home country in the last 3 years;

(4)         Compliance with financial targets in the last 3 years required under the laws and regulations and the regulatory authorities in its home country;

(5)         Good internal compliance policy;

(6)         Good reputation and business track record; and

(7)         Other conditions deem fit by the CSRC.

Business of a Securities JV

According to Article 5 of the Revised Rules, Securities JV can conduct the following businesses :-

(1)        Underwriting and sponsoring of issuance of shares (including Renminbi-denominated ordinary shares, foreign-investment shares) and bonds (including government bonds and corporate bonds);

(2)         Brokerage and operation of foreign shares;

(3)         Brokerage and operation of bonds (including government bonds and corporate bonds); and

(4)         Other business permitted by the CSRC.

The business of sponsoring of shares is now opened to the Securities JV in the Revised Rules.  Securities JV, however, still cannot engage in the brokerage of A-share.
 
According to Article 6(3), the number of the qualified securities professionals in the Securities JV required is also lowered from 50 to 30.
 
Key Shareholding Restrictions Remain

Some key shareholding restrictions are still not lifted under the Revised Rules.  The total accumulated shareholding of all of the foreign shareholders is still restricted to one third of the shareholding of the Securities JV, either in the form of direct or indirect shareholding.  Further, the shareholding of at least one of the domestic securities companies in the Securities JV shall not be less than one third.  It therefore appears that the opening of the China securities market to foreign participation will remain a gradual process.